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28 October, 2016
In recent years, we have seen an increase in the use of arbitration clauses in joint venture agreements and shareholders’ agreements intending to resolve disputes in relation to business management decisions. Is this workable in reality?
It appears that management decisions that DO NOT concern or affect the legal rights of the parties involved ARE NOT arbitrable. Only management decisions that concern or affect the legal rights of the parties, such as, for example, oppression of minority shareholders or the breakdown of mutual trust and confidence in a quasi-partnership relationship, are arbitrable.
Even though there is no direct case authority on this point, authoritative texts on arbitration have commented that “English law has never arrived at a general theory for distinguishing those disputes which may be settled by arbitration from those which may not. The general principle is, we submit, that any dispute or claim concerning legal rights which can be the subject of an enforceable award, is capable of being settled by arbitration.” (Mustill & Boyd, Commercial Arbitration, 2nd Edition, 1989)
This is also in line with the Court’s general reluctance to interfere in a company’s business affairs. Unless the decision in question concerns or affects the legal rights of a party, the Court will not interfere with the internal management of companies acting within their powers.
Thus disputes in relation to, purely business management decisions, such as what investments to undertake, the proportion of investments, what people to hire, whether to expand the business etc. will not be regarded as arbitrable disputes. The arbitrator, like the Court, is not able to and will not interfere with a company’s decisions acting within its powers.
Instead, these disputes in relation to decision-making could be better dealt with using dead-lock and buy-out provisions in order to provide certainty as to the parties’ options in the event that a consensus cannot be reached on business management matters. Alternatively, parties can consider including a provision in their joint venture or shareholders’ agreements for dealing with disputes about policy and management issues by referring them to a third party for decision. If the dispute is a more specialised one, it can be referred to an expert for determination. For example, where parties have to agree on a programme for construction works and they fail to agree, the dispute could be referred to a programming expert for determination. The programming expert could determine what programme would be the most appropriate in the circumstances, which is something neither the Court nor an arbitral tribunal is able to give an opinion on. This mechanism affords the parties more flexibility and so that the dead-lock and buy-out provisions would not be triggered so easily.
For further information, please contact:
Andrew Law, Deacons
